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Director Networks, Turnover, and Appointments

Director Networks, Turnover, and Appointments

Luc Renneboog, Yang Zhao

October 17 2017

The role of social networks in job-searching has been well studied in sociology and labor economics for laborers and employees belonging to minorities, but has not been examined intensively for corporate top management. Given that close professional and social connections exist among the corporate elites, it may well be that executive and non-executive director networks are even more important in a labor market context than employees’ connections. Contrary to many existing studies that only focus on the CEO turnover, we evaluate the turnover and succession of all board members, comprising the CEO, executive directors, chairmen and non-executive directors.

In our paper, we address the question: “To what extent do director networks affect the top managerial labor market?” Our dataset spans 12 years and comprises 2,281 companies listed in the London Stock Exchange. We focus on two types of connections in director networks, namely direct and indirect connections. The former type comprises connections between directors who are linked with one another via shared work experience and directors gain access to local information and managerial power from direct connections. Indirect connections capture that directors can be connected to important directors who are on advantageous positions in the whole network (such as ‘brokerage’ positions, i.e., bridging to groups that are otherwise separated) and can hence be regarded as intermediaries in global information gathering.

We find some interesting results: first, directors with better global information access (through indirect connections) are more likely to leave their current position for another firm. A director with many direct connections stands a better chance of promotion in and retention by his firm as the direct connections may be a proxy for his influence or power in his firm. Second, outside candidates with strong indirect networks (with higher global information collection ability) are more likely to be invited to serve as executive directors. Specifically for the position of chairman, an external director with a strong direct connectedness has a higher probability of being invited to chair the board. So, director networks grant information access and hence enhance the directors’ labor market opportunities.

The positive impact of indirect connections on labor market performance reflects the network’s information value and is in line with the ‘strength of the weak ties’ theory, which signifies that indirect connections are more efficient in terms of information acquisition, even though such connections may only be indirect and hence weaker. We also find internal labor market performance can be improved by direct connections, particularly in terms of promotion and retention. This implies that direct connections may provide information and power in the local environment. Overall, both direct and indirect connections are valuable in the top managerial labor market.

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